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What to Do With Your 401(k) if You're Laid Off and Change Jobs
Way in the past, boomers and even some generation Xers held on to jobs for 10 or more years. Some professionals stayed with the same company for most of their working lives. The Great Recession changed that for many. Now with the economy slowing down and many large companies (especially in tech) doing layoffs, many workers are moving jobs.
Millennials were already used to regularly moving jobs, and change them three times more often than other generations.
Being laid off and changing jobs introduces a new dilemma for workers, regardless of why or how often they do so: what to do with the 401(k) account they had with their former employer. Should they consider taking the cash distribution, or could there be a better choice?
Here are some reasonable options to consider for your 401(k), whether it’s cashing it out or retaining the tax-deferred benefits attached to your savings.
Option # 1: Take the Cash
Particularly if your laid off, it's tempting to increase your cash on hand by cashing out some or all of your 401(k) account. An important factor to consider if you're thinking about doing this are the tax implications. When you take cash distributions from your 401(k) account, you may pay a lot of money in taxes and fees. This includes an automatic 20% federal withholding tax plus another 10% penalty for anyone under the age of 59 and a half years old.
Option # 2: Directly Roll the Money Into an IRA
An individual retirement account is much like a 401(k), but it can remain independent of any employer. You may want to consider this option if you change jobs often or your new employer doesn't offer retirement plans. A financial planner can help you open up an IRA account and determine the best asset allocation for your timeline and risk profile.
Option # 3 Consider a Roth Conversion if You're Rolling into an IRA
Another benefit to consider if you're opening an IRA account is to convert some or all of your 401(k) funds moved into the IRA to a Roth IRA. The benefits of a Roth IRA include tax-free withdrawals in retirement without required minimum distributions. A Roth conversion might make sense during a year you're laid off if your income and therefore tax rate are lower that year. This guide includes important decision points to review if you're considering whether a conversion makes sense.
Option # 4: Move to the New Employer’s Plan
Some professionals prefer to keep rolling their 401(k) savings forward. You may want to consider this option if you mostly work corporate jobs with good 401(k) plans.
Rolling the money over directly from one employer to the next may also help to eliminate any fees from the IRS. Note that even if you are not yet eligible to contribute to your new employer’s retirement plan, you should be able to roll over your money from the previous plan.
Option # 5: Keep the Old Plan
If you have at least $5,000 in your old retirement account, your employer must allow you to retain your 401(k) account if you choose to do so.
You can no longer make contributions to the account, but you can make decisions regarding the investment of your assets. You may want to consider this option if you leave your job to start a business, or want to add some diversity to your retirement holdings.
The Importance of Research
The right approach depends on a number of factors. Aside from those mentioned above, you should consider the rules at your company, as well as longevity. Is the company in financial trouble? What happens to your retirement plan if it goes under? Some employers may also set lower thresholds to allow former employees to leave their retirement accounts behind. Speak directly with the human resources department to get some answers.
Another good source of reputable information is talking to a financial planner like me to help you navigate these and other important decisions that impact your financial life.
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Resources
https://www.gallup.com/workplace/231587/millennials-job-hopping-generation.aspx
https://www.cnbc.com/2020/01/06/think-twice-before-taking-early-withdrawals-from-retirement-savings.html
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-termination-of-employment
Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
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